Corporate And High-Yield Bonds Enjoy Issuance Bonanza, But Can It Last?

Corporate bond and high-yield bonds offerings have surged this to historic levels.

According to data from Refinitiv, year-to-date through Sept. 10, there has been about $1.493 trillion in investment-grade corporate bonds issued, while $277.3 billion in high yields have been sold – both all-time records.

(Through Sept. 10 of last year, the corresponding amounts were $867.4 billion and $172.2 billion, respectively)

“There has been a phenomenal amount of [bond] issuance,” said Peter Tchir, chief macro strategist at Academy Securities in New York. “It’s been the busiest summer I have ever seen. It’s felt like we have been setting issuance records month after month.”

The flurry in bond buying appears to have been triggered by the Federal Reserve’s vow in late March to purchase corporate bonds for the first time, which reduced borrowing costs. Initially highly rated corporations dipped their toes into the bond pool, followed by lower-quality companies attracted by cheaper funding costs.

Meghan Graper, head of the U.S. investment grade syndicate at Barclays, told Financial Times that a “healthy backlog” of bond deals should arrive after Labor Day.

“The majority of borrowers we are speaking to are looking to take advantage of the current dynamic and get in ahead of the [U.S. presidential] election,” she said.

August was an especially robust month for bonds.

“Across all currencies, bond offerings from U.S. corporations attained record highs for August of $119.2 billion for investment-grade and $46.6 billion for high-yield,” Moody’s Investors Service said. “However, the blistering pace of bond issuance overstated the overall pace of borrowing by high-yield companies.”

Andrea Roemhildt, investment manager at Aware Asset Management in St. Paul, Minn., told International Business Times that the drivers of 2020’s record corporate bond issuance include companies looking to raise cash for the uncertainties around COVID-19 and its impact on their business/industry.

“Low interest rates have also led to companies issuing corporate bonds to refinance existing debt and accelerate their planned issuance calendar,” she stated. “This allows companies to pay down lines of credit drawn on earlier in the year, making short-term debt long term. It also provides the opportunity to refinance bonds maturing within the next couple years.”

Roemhildt added that the rate of new issuance would be sustainable as long as the all-in yield [the weighted average yield to stated maturity] continues to remain low and there is strong market demand.

“Companies will continue to evaluate their debt schedule and refinance existing debt,” she said. However, Roemhildt cautioned that the pace of issuance will likely taper off eventually.

“In order to maintain existing credit ratings, companies have to monitor various metrics including their leverage ratio and excess liquidity,” she cited as one reason.

Also issuance may slow due to potential market disruption around the presidential election and the possibility of a COVID-19 resurgence this fall, which are causing companies to front-load their new issuance schedule now.